Yes Bank Restructuring Could Intensify NBFCs’ Challenges: Fitch Ratings

India’s non-banking financial companies will likely face renewed pressure on funding and liquidity due to Reserve Bank of India’s takeover of Yes Bank Ltd.

That’s according to Fitch Ratings, which believes that the Yes Bank crisis, along with the coronavirus, exacerbates risks to India's economic growth and NBFCs’ asset quality.

"The consequences will compound the credit squeeze across the country's financial system, adding to current economic uncertainty," the credit ratings agency said. "Rising asset quality and funding risks will place pressure on ratings if conditions worsen materially.”

India’s central bank had last week put Yes Bank under a moratorium for one month and capped withdrawals for customers at Rs 50,000 during this period. State Bank of India has stepped in with a Rs 2,450-crore rescue plan for the private lender, and an RBI-appointed administrator believes the curbs will be lifted as early as Saturday.

"The NBFI sector's direct exposures to Yes Bank should be modest as a whole. Yes Bank's issues have been known for some time, and companies have had time to pare back any exposure to the bank over the past year,” Fitch Ratings said. "Yes Bank's advances to NBFIs equated to roughly 1-2% of the NBFI sector's total bank funding, and the sector's asset exposures to the bank would be similarly moderate.”

RBI's planned reconstruction scheme for Yes Bank broadly protects the deposits and liabilities of the lender but calls for a writedown of its Basel III Additional Tier-I bonds.

"This may trigger another round of investor risk aversion that tightens market access and raises overall funding costs for borrowers, with wholesale NBFIs likely to remain more vulnerable in this situation," Fitch Ratings said.

There may also be knock-on effects for NBFIs if smaller private banks start to face deteriorating depositor confidence.

Banks have been an important source of liquidity for NBFCs amid the funding squeeze in the local debt markets over the past 18 months, and any weakness in bank deposit funding would constrict liquidity available for lending to the sector.

"An extended credit squeeze will likely exacerbate asset quality risks for the financial sector, including NBFIs, which are already facing pressure from a general economic and property-sector slowdown, and an evolving COVID-19 situation," it said. "The asset quality risks that have been largely centered on wholesale property development would, in Fitch's view, start to broaden if the economy becomes more adversely affected."

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These events add to the challenging operating environment for Indian NBFCs, with rising uncertainty over funding conditions in the near term.

Fitch said it will be monitoring the rated NBFCs' funding access and liquidity positions closely over the near term, and will assess the broader economic impact of recent developments on potential asset quality trends for any signs of deterioration that may have an impact on the ratings.